Transat A.T. Inc. - Results for second quarter of 2019

Winter results in line with first quarter;
due diligence underway

For the second quarter:

• Revenues of $897.4 million.
• Operating loss of $19.8 million.
• Adjusted operating income¹ of $3.0 million
• Net income attributable to shareholders of $2.3 million.
• Adjusted net loss³ of $6.3 million.
• Letter of intent entered into with Air Canada on May 16, 2019 for the acquisition of the Corporation:
• Exclusivity period up to the end of the 30-day due diligence review scheduled for June 26, 2019;
• Undertakings and expenses relating to the hotel strategy restricted during this period.
• The Corporation took delivery of its first A321neoLR aircraft.

For the first six months:

• Revenues of $1.5 billion.
• Operating loss of $72.4 million.
• Adjusted operating loss¹ of $34.7 million.
• Net loss attributable to shareholders of $47.4 million.
• Adjusted net loss³ of $42.3 million.

MONTRÉAL, June 13, 2019 /CNW Telbec/ - Transat A.T. Inc. ("Transat" or the "Corporation"), one of the largest integrated tourism companies in the world and Canada's holiday travel leader, announces its results for the second quarter ended April 30, 2019.

"The second quarter is similar to the first in terms of results. We incurred a comparable increase in our costs resulting from fuel prices and exchange rates as well as fleet transition, and we ended the winter with a larger loss than last year. While the due diligence resulting from the letter of intent signed with Air Canada is also underway, we remain focused on achieving the improvements set out in our strategic plan. We remain confident about completing these initiatives if the transaction does not take place," said Jean-Marc Eustache, President and Chief Executive Officer of Transat.

Second-quarter highlights

The Corporation posted revenues of $897.4 million for the quarter, up $30.3 million or 3.5% compared with 2018. This increase is attributable to higher average selling prices across all markets, combined with a 2.3% rise in the number of travellers in the sun destinations market, the Corporation's main market for the period, resulting from the decision to increase capacity in that market. The higher revenues were partially offset by a greater proportion of flight-only sales, which generate lower unit margins than packages.

Operations generated adjusted operating income¹ of $3.0 million, compared with $12.1 million in 2018, a decrease of $9.1 million. This change resulted primarily from the increase in fuel prices, combined with the weakening of the dollar against the U.S. dollar and the additional costs incurred for the transition and optimization of the Corporation's fleet, which in total exceeded the increase in the average selling prices of packages. Adjusted operating income¹ for 2019 includes expenses of $2.5 million related to the potential acquisition of the Corporation, comprising professional fees and adjustments to certain provisions related to stock-based compensation following the significant rise in the share price.

Net income attributable to shareholders amounted to $2.3 million or $0.06 per share (diluted), compared with $7.9 million or $0.21 per share (diluted) in 2018. For the second quarter of 2019, the net income attributable to shareholders includes the settlement of a litigation in the courts of the state of New York, in the United States; this amount was recorded as Special items in the consolidated statement of income. Excluding non-operating items, Transat reported an adjusted net loss³ of $6.3 million ($0.17 per share) for the second quarter of 2019, compared with $0.5 million ($0.01 per share) in 2018.

Six-month period highlights

The Corporation recognized revenues of $1.5 billion, up $29.4 million or 1.9% from 2018. The higher revenues recorded during the six-month period is mainly attributable to the increase in average selling prices across all markets, combined with a 2.8% rise in the number of travellers in the sun destinations market, the Corporation's main market for the period, resulting from the decision to increase capacity in that market. The higher revenues were partially offset by a greater proportion of flight-only sales, which generate lower unit margins than packages.

For the winter season, operations generated an adjusted operating loss¹ of $34.7 million compared with $16.6 million in 2018, a deterioration of $18.1 million. This change resulted primarily from the increase in fuel prices, combined with the weakening of the dollar against the U.S. dollar and the additional costs incurred for the transition and optimization of the Corporation's fleet, which in total exceeded the increase in the average selling prices of packages.

Net loss attributable to shareholders amounted to $47.4 million or $1.26 per share (diluted) compared with net income of $4.7 million or $0.13 per share (diluted) for the corresponding six-month period of last year. Net income for 2018 included a $31.3 million gain on the sale of the Corporation's subsidiary Jonview. Before non-operating items, Transat reported an adjusted net loss³ of $42.3 million ($1.13 per share) for the first six months of 2019, compared with $32.7 million ($0.87 per share) in 2018.

Financial position

As at April 30, 2019, cash and cash equivalents amounted to $796.3 million, compared with $903.3 million on the same date in 2018. This change resulted primarily from the purchase of land in Mexico ($75.7 million), from commissioning costs for aircraft added to the fleet ($19.9 million) and from the change in the calculation of cash and cash equivalents to be held in trust following the adoption of the new revenue recognition standard IFRS 15 ($13.3 million).

The working capital ratio was 1.24, compared with 1.41 as at April 30, 2018.

Deposits from customers for future travel amounted to $629.7 million, compared with $604.9 million as at April 30, 2018.

Off-balance-sheet agreements, excluding contracts with service providers, stood at $2.45 billion as at April 30, 2019, compared with $2.51 billion as at October 31, 2018. The $52.7 million decrease resulted primarily from repayments made during the six-month period, partially offset by the weakening of the dollar against the U.S. dollar,

IFRS update

On November 1, 2018, the Corporation adopted IFRS 9, Financial Instruments, and IFRS 15, Revenue from Contracts with Customers. The 2018 comparative figures have been restated to reflect these changes.

In short, the adoption of these standards resulted in a $2.6 million increase in shareholders' equity as at October 31, 2017. For the quarter and six-month period ended April 30, 2018, the adoption of these standards resulted in increases in net income attributable to shareholders of $1.3 million and $4.6 million, respectively. The main changes related to the adoption of IFRS 9 and IFRS 15 are described in note 3 to the interim condensed consolidated financial statements for the quarter ended April 30, 2019.

Outlook

Summer 2019 – The transatlantic market outbound from Canada and Europe accounts for a substantial portion of Transat's business during the summer season. For the period from May to October 2019, the Corporation's capacity is higher by 1%. To date, 64% of the capacity has been sold, the load factors are higher by 0.7% compared with summer 2018 and selling prices of bookings taken are similar to those recorded at the same date in 2018. The impact of currency variations, combined with lower fuel costs in U.S. dollars, will not result in a significant increase in operating costs if aircraft fuel prices remain stable and the dollar remains at its current level against the U.S. dollar, the euro and the pound.

On the sun destinations market outbound from Canada, for which summer is low season, Transat's capacity is similar to the one deployed on the same date last year. To date, 60% of the capacity has been sold and load factors are comparable to those of 2018. Unit margins are currently higher compared with those recorded on the same date last year.

If the current trends hold, Transat expects its results for the third quarter to be slightly higher than those of last year. However, the Corporation believes it is still too early on in the season to draw conclusions regarding the fourth quarter given the number of seats and packages sold at this stage of the season.

Discussions relating to the sale of the Corporation and strategic plan

Following the April 30 announcement on discussions with more than one party regarding the potential sale of the Corporation, the Corporation announced on May 16 that a letter of intent was signed with Air Canada for the potential acquisition of the Corporation, with an exclusivity period extending until the end of a 30-day due diligence period.

Since due diligence officially began on May 27, the exclusivity period ends on June 26, 2019.

Investments in the hotel division have been slowed down, in accordance with the commitment made in the letter of intent. Work in this division is currently focused on preparing construction on the land in Puerto Morelos and reviewing future opportunities.

Meanwhile, work on other aspects of the strategic plan continues as previously, moving forward at the expected pace.

The Corporation has taken note of the press release of Group Mach Inc. issued on June 4 concerning its expressed interest to privatize the Corporation. Nevertheless, as of this date, the Corporation has not received any formal proposal in relation to Group Mach Inc.'s June 4 press release.

Additional information

The Corporation adopted IFRS 9, Financial Instruments, and IFRS 15, Revenue from Contracts with Customers, on November 1, 2018, and restated the quarterly financial information shown in the table below for 2018.

The results were affected by non-operating items, as summarized in the following table: 

Highlights and impact of non-operating items on results
(in thousands of C$)
	Second quarter		First six months
	2019	2018	2019	2018
Revenues	897,413	867,154	1,544,979	1,515,543
Operating results	(19,802)	(3,180)	(72,357)	(46,708)
Special items	6 700	—	6 700	—
Depreciation and amortization	16,225	15,310	31,142	30,079
Premiums related to derivatives matured during the period	(77)	—	(167)	—
Adjusted operating income (loss)^1	3,046	12,130	(34,682)	(16,629)
Income (loss) before taxes	4,640	13,304	(61,714)	458
Special items	6,700	—	6,700	—
Fuel-related derivatives and other derivatives	(18,401)	(10,935)	291	(9,072)
Gain on business disposals	—	(368)	—	(31,064)
Premiums related to derivatives matured during the period	(77)	—	(167)	—
Adjusted pre-tax income (loss)^2	(7,138)	2,001	(54,890)	(39,678)
Net income (loss) attributable to shareholders	2,269	7,938	(47,377)	4,743
Special items	4,945	—	4,945	—
Fuel-related derivatives and other derivatives	(13,470)	(8,026)	213	(6,659)
Gain on business disposals	—	(368)	—	(30,736)
Premiums related to derivatives matured during the period	(56)	—	(122)	—
Adjusted net income (loss)^3	(6,312)	(456)	(42,341)	(32,652)
Earnings (loss) per share – diluted	0.06	0.21	(1.26)	0.13
Special items	0.13	—	0.13	—
Fuel-related derivatives and other derivatives	(0.36)	(0.21)	0.01	(0.18)
Gain on business disposals	—	—	—	(0.82)
Premiums related to derivatives matured during the period	—	(0.01)	—	—
Adjusted net income (loss) per share^3	(0.17)	(0.01)	(1.13)	(0.87)

Hedging – The Corporation records in the statement of income any gains or losses resulting from mark-to-market adjustments of the derivative financial instruments used to manage aircraft fuel-price risk, as well any gains or losses resulting from mark-to-market adjustments of certain hedging instruments used to manage exchange rate exposure. In the second quarter of 2019, this resulted in a $18.4 million non-cash gain ($13.5 million after income taxes), compared with $10.9 million ($8.0 million after income taxes) in 2018. For the six-month period, this resulted in a $0.3 million non-cash loss ($0.2 million after income taxes), compared with a $9.1 million gain ($6.7 million after income taxes) in 2018.

The Corporation uses derivative financial instruments to mitigate exchange rate exposure arising from its expenses and/or revenues in foreign currencies. Accordingly, under applicable accounting standards, any fluctuations resulting from the effective portion of mark-to-market adjustments of these instruments that are designated as hedging instruments are recorded in the consolidated statement of financial position and consolidated statement of comprehensive income rather than in the consolidated statement of income. For the second quarter of 2019, Transat recorded a loss of $0.3 million ($0.3 million after income taxes) on these foreign exchange derivatives, compared with a gain of $19.8 million ($14.6 million after income taxes) in 2018. For the six-month period, Transat recorded a loss of $4.2 million ($3.1 million after income taxes) on these foreign exchange derivatives, compared with a gain of $0.4 million ($0.3 million after income taxes) in 2018.

About Transat
Transat A.T. Inc. is a leading integrated international tourism company specializing in holiday travel. Under the Transat and Air Transat banners, the Corporation offers vacation packages, hotel stays and air travel to some 60 destinations in over 25 countries in the Americas and Europe. Transat is firmly committed to sustainable tourism development, as reflected in its multiple corporate responsibility initiatives over the past 12 years, and obtained Travelife certification in 2018. Based in Montréal, the Corporation has 5,000 employees (TSX: TRZ).

NOTES

The following are non-IFRS financial measures used by management as indicators to evaluate ongoing and recurring operational performance.

1. Adjusted operating income (loss): Operating income (loss) before depreciation and amortization expense, restructuring charge and other significant unusual items, including premiums for fuel-related derivatives and other derivatives that matured during the period. The Corporation uses this measure to assess the operational performance of its activities before the aforementioned items to ensure better comparability of financial results.
2. Adjusted pre-tax income (loss): Income (loss) before income tax expense before change in fair value of fuel-related derivatives and other derivatives, gain (loss) on business disposal, restructuring charge, asset impairment and other significant unusual items, and including premiums for fuel-related derivatives and other derivatives matured during the period. The Corporation uses this measure to assess the financial performance of its activities before the aforementioned items to ensure better comparability of financial results.
3. Adjusted net income (loss): Net income (loss) attributable to shareholders before net income (loss) from discontinued operations, change in fair value of fuel-related derivatives, gain (loss) on business disposal, restructuring charge, asset impairment and other significant unusual items, and including premiums for fuel-related derivatives and other derivatives that matured during the period, net of related taxes. The Corporation uses this measure to assess the financial performance of its activities before the aforementioned items to ensure better comparability of financial results. Adjusted net income (loss) is also used in calculating the variable compensation of employees and senior executives.

Conference call

Second quarter 2019 conference call: Thursday, June 13, 10:00 a.m. Dial 1-800-926-9801. Name of conference: Transat. Webcast: www.transat.com/en-CA/corporate. The archived call will be available at 1‑800-558-5253, access code 21916623, until July 12, 2019.

The third-quarter results will be announced on September 12, 2019.

Non-IFRS financial measures

Transat prepares its financial statements in accordance with International Financial Reporting Standards (IFRS). We will occasionally refer to non-IFRS financial measures in the news release. These non-IFRS financial measures do not have any meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. They are intended to provide additional information and should not be considered as a substitute for measures of performance prepared in accordance with IFRS. All dollar figures are in Canadian dollars unless otherwise indicated.

Caution regarding forward-looking statements

This news release contains certain forward-looking statements regarding the Corporation's expectation that travel reservations will follow the trends. In making these statements, the Corporation has assumed that the trends in reservations and selling prices will continue, and that fuel prices, other costs and the value of the Canadian dollar against foreign currencies will remain stable. If these assumptions prove incorrect, actual results and developments may differ materially from those contemplated by the forward-looking statements contained in this news release. Results indicated in forward-looking statements may differ materially from actual results for a number of reasons, including without limitation, economic conditions, changes in demand due to the seasonal nature of the business, extreme weather conditions, climatic or geological disasters, war, political instability, real or perceived terrorism, outbreaks of epidemics or disease, consumer preferences and consumer habits, consumers' perceptions of the safety of destination services and aviation safety, demographic trends, disruptions to the air traffic control system, the cost of protective, safety and environmental measures, competition, the Corporation's ability to maintain and grow its reputation and brand, the availability of funding in the future, fluctuations in fuel prices and exchange rates and interest rates, the Corporation's dependence on key suppliers, the availability and fluctuation of costs related to our aircraft, information technology and telecommunications, changes in legislation, unfavourable regulatory developments or procedures, pending litigation and third party lawsuits, the ability to reduce operating costs, the Corporation's ability to attract and retain skilled resources, labour relations, collective bargaining and labour disputes, pension issues, maintaining insurance coverage at favourable levels and conditions and at an acceptable cost, and other risks detailed from time to time in the Corporation's continuous disclosure documents.

This new release also contains certain forward-looking statements about the Corporation concerning a potential transaction involving the acquisition of all the shares of the Corporation. These statements are based on certain assumptions deemed reasonable by the Corporation, but are subject to certain risks and uncertainties, several of which are outside the control of the Corporation, which may cause actual results to vary materially. In particular, the completion of a transaction will be subject to the negotiation and execution of a definitive agreement to the satisfaction of the parties, Air Canada's due diligence, the approval of the Corporation's shareholders, the approval of applicable regulatory and governmental authorities, court approval of a potential plan of arrangement, the execution of support agreements by certain shareholders and the satisfaction of other conditions customary for this type of transaction. In addition, statements regarding the results of a potential transaction will depend on the purchaser's plans following the completion of a potential transaction. The Corporation disclaims any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required by securities laws.

These forward-looking statements, by their nature, necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by these forward-looking statements. The Corporation considers the assumptions on which these forward-looking statements are based to be reasonable, but cautions the reader that these assumptions regarding future events, many of which are beyond its control, may ultimately prove to be incorrect since they are subject to risks and uncertainties that affect the Corporation. For additional information with respect to these and other factors, see the Annual Report for the year ended October 31, 2018, filed with Canadian securities commissions. The Corporation disclaims any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required by securities laws.

www.transat.com

SOURCE Transat A.T. Inc.

Media: Christophe Hennebelle, Vice-President, Human Resources and Corporate Affairs, 514-987-1660, ext. 4584; Financial analysts: Denis Pétrin, Chief Financial Officer, 514 987-1660